15 May 2015

ALFI responds to the EC Green Paper on the building of CMU

On 18 February 2015 the European Commission presented its Green Paper on building a Capital Markets Union (“CMU”). The CMU project was announced in July 2014 by EU Commission President Juncker as part of his five-year agenda and a key part of the EU Commission’s 10 priorities. In its political ambition, it seeks to remove barriers to the free flow of capital in Europe, and increase the role that market-based finance plays in intermediating capital to European companies, projects and governments.

Opening the distribution of financial products to investors at large without exclusively relying on bank distribution channels to provide investment advice requires that investors become proficient with financial markets and investment opportunities. Investment in financial assets should not remain the privilege of the very few sophisticated and well-informed investors. In that sense, considerable effort must be placed in raising investors’ knowledge about and awareness of financial markets. Similarly, it would be appropriate to develop tools (by way of web-sites or similar communication platforms) to match demand and supply.

Today, SMEs are lacking a communication channel to inform investors on potential investment opportunities and investors are not aware of products on offer either. Digital investment passport and minimum standards of financial guidance to democratise advice and guidance to European investors: The development of a “digital passport “ could make the process of savings easier, by allowing multiple stakeholders such as product manufacturers, distributors, agents, advisers, regulators and government departments all to work with investors using a common platform and common data.

European legislation is based on the assumption that financial products must, by definition, be liquid and comply with strict diversification rules if one wants to offer them to retail investors. As a result, retail investors have no access to a number of financial products, including in particular loans and instruments which SMEs typically issue to finance their operations. There is a need for a broad reflection on how retail investors could access those financial products. In the same context, the rules foreseen in the ELTIF regulation for assessing the eligibility of retail investors are considered to be complex and onerous. With respect to UCITS, one recommendation is to confirm that loans (up to 10%) remain an eligible asset for funds.

SMEs have an urgent need for financing which banks cannot necessarily offer. Priority must be given to facilitating the investment in loans for securitisation vehicles, ELTIFs, pension schemes and debt funds.

The success of the forthcoming regulation will be measured by the ability to revitalize securitization markets within the EU. On one hand, new rules should provide for simple, homogeneous and transparent securitisations. A harmonised and/ or optional EUwide initiative would certainly provide more legal clarity and comparability for investors. However it should be seen as an additional tool for securitisation and should not become the only form of securitisation. Wider securitisation types should be able to survive this regime.

Full response

© ALFI - Association of the Luxembourg Fund Industry